There is renewed concern about the sustainability of rising debt levels in many African countries. Much of this debt is incurred through foreign currency denominated Eurobonds issued on international financial markets. The value of Eurobonds issued between 2018 and 2019 was more than the value of all bonds sold between 2003 to 2016.
African governments are issuing and listing their Eurobonds on established international debt markets – usually London and Irish Stock Exchanges. African governments would venture offshore a lot less if domestic bond markets were active and liquid. But besides South Africa, African bond markets are largely underdeveloped with inactive and illiquid secondary markets. This makes it difficult to attract international investor participation locally.
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The IMF believes African countries are on a Eurobond issuing spree and half of them are near or at distressed levels. It argues that African governments are piling on debt without evaluating the exchange rate risks and the real costs of repaying the debts.
Butthe problem is not that African countries are borrowing too much, but rather they are paying too much interest. There are a number of reasons for this, including badly informed ratings by rating agencies, as well as the behaviour of issuers.
There are two key elements in assessing a country’s debt burden. One is the level of debt based on the ratio of debt to gross domestic product (GDP). The other is the cost of servicing the debt – interest payments.
The scale of debt issuances in Africa amounts to only 1% of the continent’s total GDP annually – whose average annual growth rate is 4%. This means the value of income generation is higher than the rate of government debt accumulation. On the contrary, the amount of interest expenditure has been disproportionate to the debt-to-GDP ratio. Studies show that in developed economies, an increase of 1% in debt-to-GDP ratio is associated with an increase of between 0.02% and 0.03% in interest rates.
African governments are paying interest of 5% to 16% on 10-year government bonds, compared to near zero to negative rates in Europe and America. On average, the interest repayment is the highest expenditure portion and remains the fastest growth expenditure in sub-Saharan Africa’s fiscal budgets.
The rising interest rates on Africa’s debt should be of major concern. African countries are shortchanging themselves by accepting high yield curves in IPOs, unjustifiably cementing the perception they are high-risk issuers.